A low mortgage rate: is that favourable or not? Suddenly this old article from November 2019 is being read a lot again. And actually, it's no longer entirely accurate. When interest rates were so low, a fall in rates was sometimes a disadvantage.
Contents
- Calculating your maximum mortgage
- So why are there differences between mortgage lenders?
- Borrowing less at a lower rate
- The woonquote (housing cost ratio)
- Conclusion
You see it in the news more and more often lately: interest rates being lowered. Favourable, you'd think. But it can also have a negative effect on the maximum amount you can borrow. How does that work? Let me explain.
Calculating your maximum mortgage
If you look online, you'll see countless comparison sites for comparing interest rates and calculating the maximum amount you can borrow. The calculation models behind them are all set by law. All mortgage lenders have to calculate the maximum mortgage in the same way. Yet the results sometimes differ.
So why are there differences between mortgage lenders?
We'll explain this using the example below: Daan & Laura want to buy a house in the centre of Utrecht. House prices in Utrecht have risen sharply recently. Because they're first-time buyers and still want to buy a house in the centre of Utrecht, they need to get the highest possible mortgage. They search online for the bank with the lowest rate for a mortgage with NHG (the National Mortgage Guarantee) and a 10-year fixed rate. Laura earns €28,000 and Daan €22,500. After researching online, they conclude that they can borrow more at a rate of 2.03% than at a rate of 1.74%. They hadn't expected that.
At the moment interest rates are very different. Rates are higher and are now falling. At the moment it's generally favourable to choose a variable daily rate. That way your rate can fall along with the market. Read our new article about mortgage interest rates and how you can benefit from a fall.
Borrowing less at a lower rate
So they get the highest mortgage amount at a rate of 2.03%. They can then borrow €238,129. Whereas at the much lower rate of 1.74% they can only borrow €230,025. That's €8,104 less. They don't quite understand that. The monthly costs for the mortgage at a rate of 1.74% are lower than those for a mortgage at a rate of 2.03%. So surely you'd expect to be able to get a bigger mortgage at the lower rate and monthly cost? Why is that?
The woonquote (housing cost ratio)
Being able to borrow more or less at a higher or lower rate has to do with the so-called woonquote. This is the percentage of your income that you're allowed to spend on your mortgage costs. This in turn depends on your mortgage interest rate and your income. The woonquote is set by the NIBUD (the National Institute for Family Finance Information).
The woonquote is laid down in tables. The steps are always half a per cent. If you move up to a higher woonquote, you can also borrow more.
As a result, you can borrow more at a rate of 2.01% than at 1.99%. And also more than at a rate of 1.74%. Of course your monthly costs are slightly higher if you borrow more. You have to pay more interest, but also repay more. The differences are small. In this example, the net monthly costs at a rate of 1.74% are €691. The net monthly costs at a rate of 2.03% are €727. That's €36 more per month. But on the other hand, you can borrow €8,104 more.
Conclusion
So always be well aware that a lower interest rate doesn't always work in your favour. That's why you should always get good advice from a certified mortgage adviser. They'll look at the options together with you, bringing the purchase of your dream home another step closer!
